Raising $$ on AngelList? Working w/ McClure? Ask Jody Sherman

Raising $$ on AngelList? Working w/ McClure? Ask Jody Sherman

I was hanging out the other day with my buddy Jody Sherman, founder & CEO of EcoMom. I was an angel investor in his company, made a bunch of calls on his behalf and then I personally sent it out on AngelList. Through this process he raised $2 million.

When I described to people why I initially invested my calls went something like this, “He’s taken kicks to the face for nearly 2 years and is still standing. I know this guy is a money maker. I just had to line up behind him. That, plus I love the space of high-customer-service, focused eCommerce for moms worried about what their kids eat & wear.”

I found this out through my own experience as a father with two kids. I would say my wife & I are on the “non neurotic” side of parents. Still, my wife had seen a report that almost all sun blocks for kids had a chemical known to be dangerous to kids. She did a bunch of research on it and finally found a small number of safe brands.

Life would have been much easier if we could have just gone to EcoMom and let them do the vetting for us.

Let’s be clear: AngelList doesn’t scare a single VC I know. It is additive. It is a communication platform. It’s awesome. But it’s not cutting VCs out. That’s dumb, exaggerated or just ill informed.

Jody & I had been through AngelList together. If I’m not mistaken, I may have been the first person to send out an angel “personal intro” email on AngelList through their new platform when it launched or at least I was one of the first few. It worked like a charm. But before I sent it I had made 10 private phone calls, sent emails & built support.

We had a great private chat last week in my office about “how to be effective when using AngelList.” Jody didn’t exactly have an easy time fund raising because he’s not one of the prototypical Silicon Valley funded entrepreneurs. He was raising money initially in the worst market in a decade (we met in 2008), he’s in his mid-40’s, is doing a mom’s site (he has no kids) and he has a JewFro. We talk about all of this in the video.

We then started talking about Dave McClure. He had just written another one of his way-over-the-top blog posts. I was saying that he’s such a great champion of entrepreneurs who all love him but I didn’t know why he felt the need to always stick VCs in the eye (on blogs and Tweets). I think Dave has blogging Tourettes Syndrome when he hears the word VC.

I’ve known Dave for years, long before he or I were VCs. I know him to be a thoughtful, kind, hard-working if not irreverent guy. At first I was cynical about his ability to have 500 startups (or some fraction of that which is still larger than any VC has). I think how hard it is for me to be hands-on with a handful of portfolio companies.

I started to realize that Dave is able to do it because he approaches VC differently. He has set up an office, a process & people around him that are helpful to entrepreneurs in need of hands-on skills in a mass service way. I am impressed with his approach.

I still think it’s best to take money from Dave when you’re also partnered with a more focused, hands-on seed-stage VC who brings different things to the table – like more ability to write larger checks in a downturn (for one) or solving a deep crisis that involves super hands-on involvement. I’ve had to do this with 2 companies at the same time. You can’t do it with 100 – I promise.

So I wrote in my blog post about AngelList that I thought Dave was great and combined with a hands-on investor would be doubly awesome. He took this as a “back-handed compliment.” Not intended that way, it was sincere.

Anyway, Jody privately went on-and-on about how great Dave’s new 500Startups office & process is. He was talking profusely about their portfolio company email lists and the knowledge that is shared. See, Jody not only raised money on AngelList – he also raised it from Dave McClure.

So I thought, WTF? Might as well cut off our conversation and just restart it 48 hours later on camera for This Week in VC. I sent out a teaser Tweet without releasing his name.

Had I planned any of this intentionally I would have invited Bryce Roberts on to give you “both sides of the argument” but the show came together fortuitously rather than planned. I hope that I at least defended Bryce’s point-of-view in the video (and in my previous post).

Oh, and of course I shoot all of my videos at the ThisWeekIn studios which are located in the Mahalo offices. So Jason heard we were taping and swung by and crashed the end of show. Unsurprisingly I struggled to get a word in edgewise after that! But he added some good humor, spice and, yes, controversy to the close of the show.

That said, a summary below is available for those who prefer to read the notes version. A very big thank you to Travis Biziorek of Kibin who did the summary notes below. Kibin is a peer review site for essays, resumes, cover letters, etc. I love the concept. If you value the summary notes please at least check out the Kibin website & see what they do. I appreciate it.

*************** Show Notes ******************

I. Part 1/3 of Interview:
How Jody Started EcoMom, its Evolution, Fundraising Process, and Utilization of AngelList [Minutes: Start – 23:00]The Humble Beginnings as SproutBaby
EcoMom originally started as SproutBaby. It was created to provide peace of mind to moms looking for safe, healthy products for their kids. Jody self-funded the company and worked from his spare bedroom in February 2009. His passion stemmed from what he saw moms doing. He noticed their extremely social tendencies and the potential of a very large market.

A Quick Look at Jody’s Previous Success

Left Silicon Graphics to become the 16th employee of Lycos

Helped get the first security to ever be sold over the internet with a credit card

Helped acquire BuyDirect from CNET – later sold to Beyond.Com

Started MightyMail and sold to Zoom.Com which later merged with NBC

Co-founded a company in the private jet business – sold to Virgin America

The Evolution of SproutBaby to EcoMom
Starting with exclusive rights to sell celebrity chef, Tyler Florence’s, line of baby food online, SproutBaby began seeing initial traction from customer interest as physical distribution spread. As the company began to grow, brand confusion became an undeniable issue. I had also expressed my concern for SproutBaby’s lack of independence from their partner with Jody.

The partners soon outgrew each other and SproutBaby acquired EcoMom, ultimately going through a complete brand shift. They dropped their number one selling product and switched to a competitor’s product while managing not to lose a single sale. EcoMom’s metrics improved throughout this process and that’s when I decided to invest.

EcoMom Makes a Breakthrough in its Search for Funding
Jody initially struggled with landing funding for EcoMom, but had now proven he would be successful and asked for some introductions. Jody soon met with Dave McClure who ended up immediately writing a check as a placeholder investment and offering help to get EcoMom press coverage.

Paige Craig initially showed absolutely no investment interest but agreed to meet Jody and ended up investing. These introductions led to Cyan & Scott Banister who also became investors along with many other angel introductions. It soon became difficult to manage the many new investment leads.

EcoMom’s Initial Exposure on AngelList and the ResultsTom McInerney and I were the first to speak with Nivi about getting EcoMom on AngelList. Cyan pushed EcoMom out to AngeLlist once more, giving them even more credibility. Jody credits AngelList for getting his round done and credits Zao Yang, Paige Craig and me as the three people most responsible for its success (although he clearly states he can tie $1 million in funded just to Zao).

He stresses the importance of his initial legwork getting his “champions” on board before going to AngelList and feels this is a crucial first step for any startup.

Other Important Discussions in this Section you Shouldn’t Miss:

I talk about how your own personal brand can actually hinder your funding process (be self aware of how others perceive you, seek out investors who match with your style)

I explain VC “road kill” – why some VCs may be gun-shy investing in your category (if they lost a lot of money in your space they are unlikely to want to double-down on the category. It’s not only because they’re bitter or gun shy, but also they don’t want to have to explain to their investors why they lost twice on the same concept!)

My Personal Take on AngelList
I believe AngelList is capable of managing deal flow by acting as a filter. I personally like meeting teams very early on and wish I could get more proprietary deal flow from it. My personal concern is for that of the inexperienced angel. I’m not saying people shouldn’t be angels, I’m just suggesting they be careful in relying too heavily on “social proof” without having personal experience in a category, knowing the founders or having domain / product knowledge.

Bryce publicly blogged about his decision to delete his AngelList profile and Jason responded in what I called a “bullying” post. While Jason’s post had some merit, he could have handled it better and that’s why I decided to weigh in. I personally prefer debating the merits of one’s logical arguments rather than character assaults.

Q&A with Babak Nivi and Naval Ravikant, founders of AngelList

AngelList’s goal is to get good companies funded. There is no secret, just a lot of hard work and screening of both startups and investors. All investors must be accredited with a couple of deals already under their belt. Investor acceptance is on a case-by-case basis and they have kicked people out of the community.

When asked about disclosure concerns, Nivi and Naval made it clear that any prior investments by them are always disclosed up-front. They have a strict policy of sharing all deals that come into AngelList. Nothing is kept or cherry picked by them for their own gain.

Nivi and Naval say that social proof is just one element that makes for a strong AngelList profile. The ability to show traction is actually the most important piece of information on profiles. Startups should take ample time on their profiles, as it will be shown to thousands of investors.

Nivi and Naval are focused on expanding AngelList’s reach. While they currently allow international funding opportunities, the bar is set at a different level. However, three months from now there may be more flexibility with international investments. They see AngelList as flattening and fattening the funding environment by giving more access to more deals and more investors.

Other Nuggets in this Section you won’t want to Miss:

I ask Jody what makes EcoMom an exciting company

Jody talks about what it’s like working with Dave McClure

I accidently blow the cover of a hot startup raising a round of financing on AngelList (oops!) – hint – it’s a product that I talk very openly about loving but I’m not an investor

III. Part 3/3 of Interview:
Jason Calacanis Crashes the Party and Chimes in on the AngelList Debate – [Minutes: 55:00 – End]

Jason Calacanis Crashes the Party to Solidify his Stance Regarding AngelList
Jason makes it clear that he felt Bryce Roberts’ recent blog post about deleting his profile on AngelList was classic grandstanding. [I remind Jason he did the same thing when he left Facebook] He argues that AngelList has brought new angels into the market and gotten them excited. There is suddenly more access to what used to be privileged deals.

Jason asks what the role of a boutique seed investor will be going forward – he thinks they will become irrelevant. I completely disagree. I argue there is simply no substitute for experienced investors. These new angels haven’t seen good and bad markets; they might not be able to stand by entrepreneurs in the bad times.

I ask Naval about the concern of rising valuations and if he sees this as a potential issue with AngelList. Naval says valuations are definitely going up, but isn’t completely sure why. It could be a bubble or better balance of supply and demand. He continues to explain how today’s seed round has replaced the series A of yesterday. This is also a cause for increased valuations.

I argue the opposite. It’s definitely true that it takes much less money to start a company today than it did when I was starting my first company. Servers and other infrastructure expenses are a fraction of what they used to be. But what this is really doing is allowing companies to be created that couldn’t be created ten years ago. With more companies and more investors capable of funding them, VCs are simply given a larger pool of deals to select from.

I ask Naval about the importance of a lead investor. My opinion is that it’s very important to raise money from someone who is helpful and reputable and is willing to bring in the same types of investors. What if nobody stands up as a lead investor? Is this a potential issue with AngelList? Naval agrees that lead investors of these type are important.

Nivi & Naval Share some of their Future Plans for AngelList
Nivi and Naval are 100% committed to AngelList right now. Jason asks what the end game is, but Naval claims they don’t really have one in mind. At the very least, Nivi and Naval see AngelList as a tool to find good investments and help startups. But they aren’t currently interested in making investments. AngelList has really been an offshoot of VentureHacks.

They don’t see any reason to tax startups and consider it as more of a CraigsList type listing service. Some of their goals are to incorporate better matching and filtering for investors. Naval expresses the need to empower the community with more social voting in order to spread the work load of reviewing startups. He doesn’t have much interest in creating forums since there are already several out there.

To conclude, I note that we’re all in the same ecosystem (angels, seed, VC, growth equity, IPOs) and should view each other as collaborative even though we sometimes compete. AngelList has introduced new competition and competition in any industry is always good.

Interesting post. Jason is a passionate guy who doesn’t hold back. So while it is interesting to listen closely, it is dangerous to over-react.

As far as AngelList – I have first hand experienced how helpful Naval is to start-ups. I feel it is great that they don’t talk about an “End Game” – they just want to make things better in the start-up ecosystem. That is really great.

http://bothsidesofthetable.com msuster

Agreed on all fronts. re: Jason – I never over react. I know him for who he is. That said, when somebody else that I really respect feels under assault I usually rise to that person’s defense. It’s an instinctual reaction.

Anonymous

I really enjoyed the interivew (more than once in order to write the summary). It was nice to have both a Q&A and a small debate with differing opinions.

Something I’ve really enjoyed from AngelList is the incredible commitment by Nivi and Naval. Naval personally sent me feedback on our profile in just a few days after creating it. He sent several messages back and forth with other advice. That kind of willingness to help and availability is incredible.

Another great show, Mark. I happened to catch this one, but I just love the write-ups on your blog because I usually don’t have time to watch. Excellent “feature.”

I thought this line was really intriguing: “I know this guy is a money maker. I just had to line up behind him.” It’s a great case study of the “lines, not points” concept. Sounds like the main data points that changed your mind were addressing the brand confusion while hanging on to customers, improving metrics, and general resilience. Any other nuances to how your thinking about Jody and the company changed over time?

http://twitter.com/HumphreyPL Humphrey

Hi Mark,

Great interview and loved reading the outlines.

I was wondering if you think AngelList with their international presence will assist in more international deals being done across the pond in terms of US Angels/VC investing in more Australian/Asian startups either individually or as a group? Or do you really just see it assisting in connecting thoue already in the same country/city?

I understand the major value of any investor is their time, connections and experience so overseas investments might not be the best option when you have so much to choose from in the US but just interested in your thoughts.

Also are you interested in having any foreign startups becoming “dots” on your relationship graph? If so what would the startup have to do besides fly to the LA for a $1600 coffee to meet you?

Cheers,
Humphrey Laubscher

http://twitter.com/HumphreyPL Humphrey

Hi Dave, I love your marketing and customer acquisition philosophies and the great work you did with Mint.com. I am taking a long shot but I was wondering if you knew of anyone in Australia who really follows your principles. Cheers, Humphrey p.s. Thanks for AARRR!

http://www.victusspiritus.com/ Mark Essel

Appreciate the text outline of the video.

http://bothsidesofthetable.com msuster

No other nuances. I watched him perform under very difficult circumstances and handle it with poise. That tells you a lot about an individuals character. You’re exactly right on this one – line, not a dot.

http://bothsidesofthetable.com msuster

– If AL is successful in it’s internationalization I believe it will be in matching local entrepreneurs with local (or regional) funders NOT bringing more angels / VCs to do deals abroad. My rationale is that most early-stage deals are best done locally where the investor can better screen the deals & help the ones they invest in with hiring, intros, biz dev, etc. Otherwise the investor is just a “stock picker.”
– For the same reason I’m really not looking to do deals in Australia unless they have already committed to working in the US (and probably have a team here already).
– I do occasionally look at deals in the UK, but I lived there for a decade and therefore have a network & knowledge of the people / country / business environment

Anonymous

Thanks for another great episode.
Well done to Jody for sticking out through the crap times, really well deserved!
(hope you do amazingly well and that your wife thanks you for sticking it out)

@Mark, so impressive to see you “walk the walk” with Jody.
Having watched most of the TWiVC episodes, you often comment on what you do or say in situations, but listening first hand to Jody’s story and the way you implement your philosophy and do the things you always talk about was a treat!

Great to see Nivi & Naval on the show too. It will be interesting to see how the international expansion plays out for AngelList.

http://twitter.com/jodysherman jodysherman

My wife is incredibly supportive and has been the entire time. Her concern was a valid one (at least to someone who might be considered more rational than I am) our most valuable investable asset is my time and I was spending an inordinate amount of it building a company that was draining our bank account. That’s what I had to do to make it work. She understood it, she just didn’t like it. Hard to blame her.

And as for Mark, he most certainly does walk the walk. The size of his investment (typical angel investment) is far exceeded by his contribution to my fund raising process. Even before we funded, he worked damn hard to help me get to the right people, formulate strategy, pre-game about certain investors to whom I was going to meet, etc. And he still makes time for me.

There are several others in my deal who worked just as hard to get us funded (McClure, Paige, Zao, Cyan, Fabrice, for example) and I think that’s testimony to running a real sales process (as opposed to just putting us up on AL and hoping we get traction). We had to be an interesting business first, then find the right people for whom it was interesting, then work with them to identify others who would feel similarly, etc.

http://twitter.com/jodysherman jodysherman

Thanks Dave. Everything I said was true. Glad to be in your portfolio and love what you are doing with 500 Startups. The energy in that building is amazing and the connections I’ve made as a part of the portfolio are awesome.

Anonymous

Having personally raised money shortly after the Lehman crash, I totally identified with the “getting kicked in the face, and just plowing on” part of your story.

I thought it was very cool the way you turned Paige into a major supporter considering his first reaction was “couldn’t give a xxxx”.
He’s said the exact same thing about other deals on TWiVC too and so passionately.

Just go’s to prove that a “no” is not always a no!

All the best for your upcoming site renewal (and especially looking forward to the “ninja s*it”).

Oh and just for the record, I loved your hair!

http://pegobry.tumblr.com/ Pascal-Emmanuel Gobry

I’m glad to be able to generate discussions for you Mark. 😉

http://bothsidesofthetable.com msuster

LOL. I had seen that you wrote that article so I actually toned down what I said about it in this post (if you can believe that). Your articles that I’ve seen before have been well written so I figured this was just intentionally controversial.

It is so incredibly off the mark in all honesty. Naval doesn’t scare anybody. Mostly people respect him and want to work with him (other than those who he knows from the past – I guess he had some VC tension if I understand correctly). But not due to AngelList.

I figured it was good link fodder for SAI, though.

http://twitter.com/addroid_com Addroid

Mark if you think Jody has crazy hair then I can’t wait till we meet.

http://twitter.com/rkillgo Russell Killgo

Great video Mark. We are getting ready to submit our app to Apple this week. First time for me… I used to get this feeling before a big pool match. A little bit of nerves with a lot of excitement. I love this! I am not going to be in Austin next week unfortunately, but both Morgan (my CFO) and I will be in S.D. for your Tech Founders speaking engagement. Will you be staying the night in S.D.? and if so, can we buy you a cup of coffee the next morning? Although, I’m not sure meeting with a VC on April Fool’s day is the best idea…

I guess you might only see international deals happen if AL started seeing more Series B/C rounds where startups are already profitable and are just looking for capital to apply the rocket burners. As was the case with Atlassian but I believe they did open up a San Fran office and had a local relationship.

I also lived in the UK for 4 years from 2003 and it was really was such a great experience but I might of had a few too many pints.

http://twitter.com/jodysherman jodysherman

Mark, I saw him onstage at LAUNCH. I wouldn’t necessarily call his hair “crazy” but it sure isn’t “normal guy hair”. But more importantly, his presentation kicks ass and his product was really impressive!

http://bothsidesofthetable.com msuster

I look forward to meeting in SD. Coffee might be hard, but we’ll see. I have family in SD so I often have other social plans.

Humphrey

I have the same problem with my Mrs before I have even started but if I prove myself to her I believe she will begrudgingly follow as long as there is a plan and outcome.

http://twitter.com/billmcneely Bill McNeely

Thank you for posting the show notes. As I work in remote locations my bandwidth is not alway robust enough to see the show.

Thank you for sharing your wonderful insights. I applied your lessons learned and the result was Hello I’m Logistics making from a list of 100 firms down to the semi-finalist group of 18 at Tech Wildcatters earlier this year.

http://twitter.com/chapleywatson Chapley Watson

Why hasn’t anyone just came up with a 1 stop shop for commenting? Like bringing in all of the social networks and allowing you to post from either one? I haven’t looked if there really are any solutions out there like that and, if not, then I probably just gave away a million dollar idea, but I don’t care… I’d much rather have this “disqus” like commenting iface with the option of signing in via twitter, fb, etc.

I really dislike what Techcrunch did my switching over.

http://twitter.com/chapleywatson Chapley Watson

Accckkkk – Mouse spun a little too far down and commented on the wrong thread! Awesome.

Anonymous

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Mark Suster is a 2x entrepreneur turned VC. He joined Upfront Ventures in 2007 as a General Partner after selling his company to Salesforce.com.